ACCT 4A(9.4-9.6)

Recording Of Depletion

Analyze the image and notice how depletion is recorded. A new account used in these cases is "Accumulated Depletion," which is similar to Accumulated Depreciation.

Copyrights

A copyright is the exclusive right to reproduce and sell a book, musical composition, film, other work of art, or intellectual property. Copyrights also protect computer software programs, such as Microsoft® Windows® and the Microsoft® Excel® spreadsheet software. Issued by the federal government, a copyright is granted for the life of the creator plus 70 years.

Trademarks

A trademark (also called trade name) is an asset that represents distinctive identifications of products or services, such as the Nike "swoosh" or the McDonald's "golden arches." Legally protected slogans include Chevrolet's "Like a Rock" and De Beers's "A Diamond Is Forever." The cost of a trademark or trade name is amortized over its useful life.

Franchises

Franchises are privileges granted by a business to sell goods or services under specified conditions. The Dallas Cowboys football organization is a franchise granted by the National Football League. McDonald's and Subway are well-known business franchises.

Goodwill

In accounting, goodwill is the excess of the cost to purchase another company over the market value of its net assets (assets minus liabilities). Goodwill is the value paid above the net worth of the company's assets and liabilities. Goodwill is NOT amortized

Definite Life vs. Indefinite Life

Intangibles either have a definite life or an indefinite life. Intangibles with an indefinite life have no factors (such as legal and contractual obligations) that limit the usage of the intangible asset. Only intangibles that have a definite life are amortized.

Licenses

Licenses are privileges granted by a government to use public property in performing services. A radio station might be granted permission by the federal government to use the airwaves to broadcast its music. The acquisition cost of a franchise or license is amortized over its useful life.

Amortization Of A Patent

Notice how although the business is given 20 years to be the only the sell and produce the invention, the time the business believes it will actually have before a better invention comes out is only 5. This value is what matters when calculating amortization. Notice how there is NO accumulated amortization account. The reason for this is because the residual value of an intangible asset is usually zero.

Natural Resources

These are assets that come from the earth that are consumed. Examples include iron ore, oil, natural gas, diamonds, gold, coal, and timber.

Intangible Assets

These are assets that have no physical form. Instead, these assets convey special rights from patents, copyrights, trademarks, and other creative works.

Patents

This is an intangible asset that is a federal government grant conveying an exclusive 20-year right to produce and sell an invention. The acquisition cost of a patent is debited to the Patent account.

Amortization

This is the allocation of the cost of an intangible asset to expense over its useful life. Amortization applies to intangibles exactly as depreciation applies to equipment and depletion to oil and timber.

Depletion

This is the process by which businesses spread the allocation of a natural resource's cost to expense over its usage. It's called depletion because the company is depleting (using up) a natural resource such that at some point in time, there is nothing left to extract. Depletion expense is computed by the units-of-production method.

Impairment

This occurs when the fair value of an asset is less than the book value. In other words, there has been a permanent decline in the value of the asset. If an impairment occurs, the company records a loss in the period that the decline is identified. Intangible assets with an indefinite life are continuously tested for this.

Asset Turnover Ratio

This ratio measures the amount of net sales revenue generated for each average dollar of total assets invested. This ratio measures how well a company is using its assets to generate net sales revenue. Net Sales Revenue/Average Total Assets The higher the ratio the better.